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Ruling on Trustees reporting obligations

First ruling from the French Tax Authorities in respect of the reporting obligations of the Trustees
More clarification?

The French Parliament adopted on the 6th July 2011 a major reform of wealth taxation (Rectified Finance Act for 2011), including a new tax regime of foreign Trusts in France. This new law came into force on 31st July 2011.
The new article 1649 AB of the French Tax Code (FTC) has created an obligation for the Trustees to disclose information in respect of the existence, modification or extinction of the Trust and the specifications of the Trust. The Trust’s assets must also be disclosed when the 0.5% specific tax can apply. This disclosure obligation applies if the settlor or a beneficiary is French tax resident, or if the Trustees hold a French situs asset. If the Trustees do not comply with this disclosure obligation, they are liable for a penalty of 5% of the worldwide Trust assets. The settlor and beneficiaries are jointly liable for the payment of this fine. Non-compliance could also trigger the application of the specific tax of 0.5%.

This new reporting obligation has raised a lot of questions from the Trustees as the text of law is far from clear. A Decree should comment these new provisions.
In the meantime, a ruling from the French Tax Authorities (FTA) dated 23 December and released on 28 December has tried to give more clarity on the scope of this new reporting obligation of the Trustees. This ruling does not deal with other provisions of the new law.

Trusts outside the reporting obligations

- Trusts to manage pension rights acquired by a beneficiary, during his professional activity, in the frame of a pension plan set up by a company (or group of companies).
- Trusts set up by a company (or a group of companies) for their own benefit where the “settlor” does not meet the definition of “settlor” under the new law (i.e. the settlor is not an individual having effectively placed the assets into the Trust).

To be outside the scope of the disclosure information, the Trustees must be subject to the law of a country having concluded with France a tax treaty with an administrative assistance clause.

In certain cases, the Trustees of EBT and IPP should therefore not be subject to the new reporting obligations. However, this should be checked on a case by case basis.
It seems that charitable Trusts are not outside the scope of the reporting obligations.


Retroactive aspect of the new law

The first part of article 1649 AB of the FTC provides that the Trustees must file a tax return (in respect of the reporting obligations) when:
- The settlor is tax resident in France;
- Or one beneficiary is tax resident in France;
- Or at least one Trust asset is situated in France as defined by article 750 Ter of the FTC. The reference to this article gives us more clarity on the definition of Trust assets. This is the definition that already applies to gift tax, inheritance tax and wealth tax.

Very surprisingly, the ruling provides that the Trustees shall meet these reporting obligations:

- For the trusts in existence on 31st July 2011, with the filing of a tax form providing with the Trust’s specification;
- For the Trusts set up after 31st July 2011, with the filing of a tax form providing with the creation of the Trust and with the Trust’s specification;
- For all these trusts, with the filing of a tax form providing with the Trust’s amendments or extinction, made since 31st July 2011.

It was not expected that the reporting obligations would apply to Trusts not in existence on 1st January 2012. Also, the exclusion of French resident beneficiaries between 31 July and 31st December 2011 does not seem to prevent the Trustees from their disclosure obligations. However, it is not clear how the new reporting obligations can retroactively apply to any Trusts in existence on 31st July 2011.

Exemption for Trustees holding purely financial investments in France

When neither the settlor nor any beneficiaries are French residents, the Trustees are subject to the reporting obligations if they hold a French situs asset.

However, the ruling explains that when the Trustees hold exclusively financial investments, the Trustees do not need to fulfil with the reporting obligations except if these investments were originally transferred into the Trust or transferred during later modifications of the Trust.

In other words, if the Trustees have (directly or indirectly) invested in a portfolio including French shares (see below definition of financial investments) they should be outside the scope of the reporting obligations unless the settlor or a beneficiary becomes French tax resident. This is good news for the Trustees having investing in France only in financial assets.


Annual disclosure information in respect of the Trust’s assets

For memory, in the case where the trust assets have not been taxed in the settlor’s wealth, a specific tax of 0.5% (sui generis wealth tax) will have to be paid by the Trustees (even if the taxpayer is the settlor). This would apply whether the settlor or any of the beneficiaries are residents of France, or if the Trustees hold a French situs asset or right.
However, this 0.5% specific tax does not apply if the assets have been reported by the settlor (and subject to wealth tax if applicable) and the above disclosure obligations have been complied with.

The ruling explains also that according to the second part of article 1649 AB of the FTC, the Trustees, who are within the scope of the new 0.5% specific tax, must annually disclose the Trust’s assets as well if:

- The settlor is a French tax resident;
- Or at least one beneficiary is a French tax resident;
- Or at least one of the Trust’s assets is situated in France. When the settlor and all the beneficiaries are not resident in France, the assets or rights located in France must be disclosed, including those exempted from wealth tax, with the exception of financial investments.

The ruling gives a definition of financial investments and explains that it includes deposits in euros or in other currencies, shareholders current accounts in a French tax resident company, bonds, shares, stocks or any rights issued by a  French resident company, life insurance or capitalization policies subscribed with insurance companies located in France.

Do not qualify as financial investments:

- Shares representing more than 10% of the share capital of a French company;
- Shares held directly or indirectly in a French real estate company;
- Or shares in a company owning a French real estate and in which a non-resident hold directly or indirectly at least 50% of the share capital.

In these cases, the assets must be reported by the Trustees even if the settlor and all the beneficiaries are not resident in France.

This article is for general information only and is not intended to provide legal advice

For further information, please contact:
Caroline Cohen
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These publications are intended to provide general information and guidance only and are not intended to provide advice to any specific person.

You are recommended to seek professional advice before taking or refraining from taking any actions based on the contents of these publications.

Tax law is subject to change.